Severn Trent leads water company shares higher after regulator's review

Shares in Britain's water companies jumped after the regulator unveiled a
wide-ranging settlement that was not as tough on the industry as had been
feared.

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9:11AM GMT 26 Nov 2009

The shares of Severn Trent ,United Utilities, Northumbrian Water and Pennon all climbed more than 3pc in London after the watchdog Ofwat said that average bills in England and Wales will fall by £3 to £340 by 2015. An initial proposal in July had pencilled in a steeper cut of £14 to £340.

Regina Finn, chief executive of Ofwat, insisted that that "we've scrutinised every pound in the companies' plans to make sure they deliver what customers want."

The settlement also demands that companies invest £22bn in the country's water and sewage infrastructure over the next five years in a bid to reduce leaks, improve service and cope with the rising threat of floods.

Known as the final determination, Ofwat's proposal has been drafted over the past few months after the regulator took submissions from the industry.

"It's a less harsh settlement but by no means a generous settlement," said one City analyst. "It should put the water companies back on people's radars as low-risk and stable return stories."

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Rattled by the prospect of a tough settlement, water companies have warned that billion-pound investment in Britain's ailing water and sewage network could be jeopardized. Analysts had speculated that Severn Trent, Britain's second-biggest water company, and United Utilities, may be forced to cut their dividends in the wake of the settlement.

"The question now is how certain can we be that rights issues and dividend cuts are off the table," said the analyst.

The regulator's last settlement in 2004 was heavily criticised by consumer groups for allowing companies too generous returns during the last five years. Today it stuck with an initial proposal that companies' average cost of capital would fall to 4.5pc over the next five years from 5.1pc under the current settlement.

Under Ofwat's plan, companies will spend £12.9bn on pipes and treatment works, £4.6bn on improving drinking water, £2.7bn on increasing supply of water, £1.1bn improving service levels and £0.9bn on larger projects such as sewers.